‘Just say slow’ the new ‘just say no’ for Canadian companies fending off hostile takeovers

The boards of Canadian public companies have long wished for the right to “just say no” to hostile takeover bids. That may change in 2013 if Canadian takeover rules shift in a direction that gives rise to a new catchphrase: “just say slow.”

Canadian merger and acquisition lawyers have been carefully examining the public statements by officials with Canada’s largest securities regulator, the Ontario Securities Commission.

The OSC has yet to produce an official document that outlines a change to corporate takeover rules. But Canadian lawyers believe the commission could this year release a proposal that addresses key differences in the takeover rules that govern public companies in Canada and the U.S.

Corporate directors in the U.S. have the right to refuse a hostile bid without having to put the offer to shareholders. Canadian directors lack this ability to “just say no” to an unsolicited bid, which many on Bay Street have complained leaves Canadian companies sitting ducks for hostile suitors.

Canadian lawyers aren’t expecting the OSC to bring the “just say no” defence to Canada. But they are expecting what might be the next-best thing — more time to challenge hostile bids.

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The OSC is expected to lengthen the time a target company’s board would have to respond to a hostile bid. There could also be some procedural changes that would complicate and delay a bidder’s ability to challenge a target board’s primary defensive tool, the shareholder rights plan, more commonly known as a poison pill.

This new regime would enable target boards to delay their response to hostile bids, John Emanoilidis, Mile Kurta and Sophia Tolias of Torys LLP say in a report on M&A trends for 2013.

“We expect that Canadian boards may become more bold in their defensive tactics,” conclude the lawyers, who came up with the phrase “just say slow.”

“Hostile bidders should brace themselves for messier hostile bids that will cost more money and be more difficult to complete.”

This, of course, assumes the law changes as expected. OSC officials have provided fairly detailed explanations of what the commission may propose. And while it’s the OSC that has been talking about the changes, M&A lawyers would eventually want to see new takeover defence guidelines emerge from the Canadian Securities Administrators, which coordinates securities policies across Canada’s patchwork of provincial and territorial regulators. So it would take some time for any proposal unveiled by a securities regulator to have nation-wide impact.

“The new proposal is complex, and it is unclear whether it will receive enough buy-in to ever see the light of day,” write John Ciardullo, Steeve Robitaille and Simon Romano of Stikeman Elliott LLP in that firm’s outlook for 2013 M&A.

A poison pill is supposed to enable a target company to thwart an unwanted bid by flooding the market with cheap shares. No company ever does that. Rather, the pill is simply used to buy time for the target company to line up alternatives to the hostile bid. That’s why target companies would welcome any rules that would grant them even more time to search for those alternatives.

U.S. courts allow boards to exercise their “business judgment” to decide whether it’s worth putting an unsolicited bid to shareholders. If the board rejects the offer, it can rely on the company’s poison pill to keep the hostile bidder at bay indefinitely. That’s how a U.S. board “just says no.”

Canadian rules put the shareholder first. Boards can use a poison pill to fend off an unwanted bid only for a limited time, perhaps 45 to 60 days. After that, a bidder can ask a securities regulator to “cease trade” the poison pill so shareholders can vote on the offer.

M&A lawyers think the OSC will make it easier for a board to keep a pill in place for longer, perhaps 90 days.
The OSC is also expected to change the way bidders mount legal challenges to poison pills. Rather than challenge the pill before a securities commission, bidders may have to ask the target company’s shareholders to convene a special meeting to amend the terms of the pill. So, what can currently be done through relatively quick and cheap securities commission hearings could give way to long and costly proxy battles.

Torys has flagged four other M&A trends for 2013. The firm also expects Canadian companies to boost international acquisitions, to confront more challenges from activist shareholders, to face an increase in legal challenges by disappointed shareholders, and to notice a change in the way foreign companies structure bids for Canadian energy assets.

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Toronto law firms donated more than $20,000 to Postmedia’s Raise-a-Reader campaign during 2012. Next week, I hope to return the favour by mentioning some of the favourite charities of these firms.